LLOYDS REGISTER UK, MUMBAI V. DDIT RG 4(1), MUMBAI

ITA 3586/MUM/2011

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9573 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 13-07-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 04-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DARS E SAMUEL
• Keywords: Business income; Transfer pricing; Double taxation relief
• Section: 234B

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI L BENCH BEFORE S/SH. RAJENDRA,ACCOUNTANT MEMBER & RAM LAL NEGI,JUDICIAL MEMBER /.ITA NO.3586/MUM/2011, /ASSESSMENT YEAR-2006-07 ADIT-(IT)- RANGE-4 MITTAL COURT, NARIMAN POINT MUMBAI-400 021. VS. M/S. LLOYDS REGISTER U.K. (FORMERLY KNOWN AS LLOYDS REGISTER OF SHIPPING) 63-64, KALPATARU SQUARE, 6 TH FLOOR KONDIVITA LANE, ANDHERI(E), MUMBAI-400 059 PAN:AAACL 2209 B ( / APPELLANT) ( /RESPONDENT) /.ITA NO.3139/MUM/2011, /ASSESSMENT YEAR-2006-07 M/S. LLOYDS REGISTER U.K. MUMBAI-400 059. VS. ADIT RANGE-4 MUMBAI-400 021. ( / APPELLANT) ( / RESPONDENT) /ASSESSEE BY : SHRI NITESH JOSHI / REVENUE BY : SHRI DARSE SAMUEL / DATE OF HEARING : 13.09.2017 / DATE OF PRONOUNCEMENT : 13.09.2017 , 1961 1961 1961 1961 254 254 254 254( (( (1 11 1) )) ) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER, DATED 3/03/2010, THE ASSESSI NG OFFICER (AO) AND THE ASSESSEE HAVE FILED CROSS APPEAL FOR THE YEAR UNDER CONSIDERATION . ASSESSEE- COMPANY, ENGAGED IN THE BUSINESS OF SHIP CLASSIFICATION AND SURVEY ETC., FILED ITS R ETURN OF INCOME, ON 30/11/2006, DECLARING TOTAL INCOME OF RS.5.60 CORES. THE AO COMPLETED THE ASSES SMENT, U/S. 143(III) R.W.S 144C (III) OF THE ACT, DETERMINING ITS INCOME AT RS.23.32 CRORES. 2. DURING THE COURSE OF HEARING BEFORE US, THE AUTHOR REPRESENTATIVE (AR) STATED THAT THE ASSESSEE WAS NOT INTERESTED IN PURSUING GROUND NO.2 . HENCE, SAME STANDS DISMISSED. ITA NO. 3586/MUM/2011 ITA NO.3586 &3139/MUM/2011(06-07) M/S. LLOYDS REGISTER U.K. (FORMERLY KNOWN AS LLOYDS REGISTER OF SHIPPING) 2 3. FIRST GROUND OF APPEAL RAISED BY THE AO AS WELL AS THE ASSESSEE, IS ABOVE CONFIRMING/DELETING 50% OF MANAGEMENT CHARGES, RECE IVED FROM LAWYERS REGISTER ASIA- INDIA BRANCH OFFICE AND 50% OF MANAGEMENT CHARGES RECEIVE D FROM LAWYERS REGISTER QUALITY ASSURANCE- INDIA BRANCH OFFICE AS FEES FROM TECHNICAL SERVICES . 4. DURING THE COURSE OF HEARING BEFORE US THE REPRESE NTATIVE OF BOTH THE SIDES AGGRIEVED THAT IDENTICAL ISSUE WAS DEALT WITH BY THE TRIBUNAL IN I TS ORDER DATED 18/03/20016 (ITA 3138/MUM/2011-AY 2005-06. WE ARE REPRODUCING PARAGR APHS 2-5 OF THE ORDER OF THE TRIBUNAL FOR AY 2005-06 (SUPRA) SAME READ AS UNDER:- 2. M/S.LLOYDS REGISTER,UK,HAVING AN INDIA OFFICE,HAD F ILED THE RETURN OF INCOME IN AS LLOYDS REGISTER-INDIA OFFICE(LRIO).UK PARENT COMPAN Y HAD SEVERAL SUBSIDIARIES ALL OVER THE WORLD, INCLUDING TWO SUBS IDIARIES IN UK,HAVING THEIR BRANCH OFFICE IN INDIA NAMELY LLOYDS REGISTER ASIA, (LRA)AND LLOYDS REGISTER QUALITY ASSURANCE LTD.(LRQA).ASSESSEE DISCONTINUED ITS INDIA OPERATION AS BRANCH OFFICE W.E.F 1.4.2004.DURING THE PREVIOUS YE AR,ALL THE ASSETS AND LIABILITIES WERE UNDER PROCESS OF TRANSFER TO LRA-INDIA BRANCH OFFICE(LRA-IBO) AND LRAQ- INDIA BRANCH OFFICE(LRAQ-IBO).LLOYDS REGISTER UK EN TERED INTO LICENCE AGREEMENT ON 16.7.2003 WITH LRA AND LRQA AND CERTAI N RIGHTS WERE TRANSFERRED TO THEM. DURING ITS WORLD-WIDE CORPORATE-RESTRUCTURING,LLOYD S APPLIED FOR CLOSURE OF ITS BRANCH VIDE ITS APPLICATION DATED 13.10.2003 AND RB I GRANTED FINAL APPROVAL VIDE ITS LETTER DATED 02.12. 2005. EVEN AFTER CLOSURE OF ITS INDIA BRANCH OFFICE,THE ASSESSEE WAS FILING ITS RETURN OF INCOME FROM AY.20 05-06 ONWARDS AS IT HAD STARTED EARNING ROYALTY INCOME FROM ITS TWO SUBSIDI ARIES I.E.LRA AND LRQA.AS STATED EARLIER,IT ENTERED INTO TWO TYPES OF AGREEME NTS.FIRST AGREEMENT I.E.LICENCE AGREEMENT DEALT WITH THE RIGHT TO USE THE INTELLECT UAL PROPERTY AND TECHNICAL AND MARKETING SUPPORT SERVICES TO VARIOUS CLIENTS AGAIN ST THE PAYMENT OF ROYALTY.THE AGREEMENT WAS ENTERED INTO BETWEEN LLOYDS REGISTER UK AND LLOYDS REGISTER ASIA LTD. AND LRA.THE SECOND AGREEMENT WAS TERMED A S MANAGEMENT SERVICES AGREEMENT.AS PER THE AGREEMENT LLOYDS REGISTER UK A ND LLOYDS REGISTER ASIA LTD.WERE THE SERVICE PROVIDER AND LRQA WAS SERVICE RECIPIENT.BOTH THE AGREEMENTS WERE VALID FOR THE PERIOD UPTO JUNE,2007 .LLOYDS REGISTER,UK AND LLOYDS REGISTER QUALITY ASSURANCE,UK OPENED THEIR R ESPECTIVE BRANCH OFFICES IN INDIA.DURING THE YEAR UNDER CONSIDERATION FOLLOWING AMOUNTS WERE PAID BY BOTH THE SUBSIDIARY COMPANIES TO LLOYDS REGISTER UK: NAME OF THE SUBSIDIARY ROYALTY MANAGEMENT CHARGES LLOYDS REGISTER ASIA LTD.(U.K.) 13,89,20,438/ - 4,42,92,396/ - LLOYDS REGISTER 89,14,963/ - 22,40,853/ - ITA NO.3586 &3139/MUM/2011(06-07) M/S. LLOYDS REGISTER U.K. (FORMERLY KNOWN AS LLOYDS REGISTER OF SHIPPING) 3 QUALITY ASSURANCE LTD.U.K. TOTAL 14,78,35,401/- 4,65,33,249/- OUT OF THE ABOVE AMOUNT,LLOYDS REGISTER UK,OFFERED ROYALTY INCOME OF RS.14.78 CRORES FOR TAXATION,HOWEVER RS.4.65CRORES RECEIVED UNDER THE HEAD MANAGEMENT CHARGESWERE CLAIMED TO BE NON CHARGEABLE IN INDIA. THE AO DID NOT AGREE WITH THE ASSESSEE AND HELD THAT MANAGEMENT CHARGES,AMOUN TING TO RS.4,65,33,249/- WERE TAXABLE IN INDIA AS FEE FOR TECHNICAL SERVICES (FTS)UNDER ARTICLE-13(2)(A)(II) OF THE INDIA-UK DTAA R.W.S.9(1)(VII)OF THE ACT.HE W AS OF THE OPINION THAT THERE WAS NO ARRANGEMENT BEFORE 16.7.2003,THAT EARLIER TE CHNICAL AND MANAGERIAL SERVICES(MS)WERE CONSIDERED PART OF THE BUSINESS AC TIVITY BY THE ASSESSEE- COMPANY,THAT PROFIT ARISING OUT OF SUCH ACTIVITIES WAS OFFERED FOR TAXATION IN INDIA UNDER THE HEAD BUSINESS INCOME. 3. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PRE FERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY( FAA).BEFORE HIM,IT WAS C ONTENDED THAT TO ATTRACT SECTION 9(1)(VIII)(C) OF THE ACT TWO CONDITIONS WER E REQUIRED TO BE FULFILLED I.E. RENDERING OF SERVICES IN INDIA AND UTILISATION OF S ERVICES IN BUSINESS/PROFESSION CARRIED OUT BY THE PAYER IN INDIA, THAT THE MS WERE NOT COVERED BY DEFINITION OF FTS, THAT SERVICES WERE RENDERED FROM OUTSIDE INDIA , THAT AS PER THE ARTICLE 13 OF DTAA FTS WERE NOT MS, THAT THE TERMS MS AND TECHNIC AL AND CONSULTANCY HAD NEITHER BEEN DEFINED IN THE ACT OR IN THE DTAA, THA T THE DICTIONARY MEANING OF PHRASE TECHNICAL SERVICES(TS)WAS SERVICES INVOLVING OR CONCERNED WITH MECHANICAL, ARTS AND APPLIED SCIENCES, THAT CONSULT ANCY SERVICES(CS)MEANT SERVICES WHICH WERE ADVISORY IN NATURE AND WHICH WE RE RENDERED BY A CONSULTANT, THAT CS COULD BE MANAGERIAL OR TECHNICAL, THAT SERV ICES AS ENVISAGED UNDER AGREEMENT WERE NOT TECHNICAL IN NATURE BUT SAME WER E COMMERCIAL, THAT MS WERE SUPPORT SERVICES CONDUCTED BY GROUP ENTITIES AND RE NDERED AS PER THE INDEPENDENT AGREEMENTS, THAT MS WAS TOWARDS ADOPTION AND CARRYI NG OUT POLICIES OF THE ORGANISATION, THAT EVEN IF SERVICES WERE TREATED AS TS-IT HAD TO BE MADE AVAILABLE AS PER THE ARTICLE 4(C) OF THE TAX-TREATY,THAT SUCH SERVICES WERE NOT TAXABLE UNDER THE TREATY AND THAT THE FACT WAS ACCEPTED BY THE AO HIMSELF,THAT THE DEFINITION OF FTS IN THE ACT AND IN THE DTAA IS NOT THE SAME,THE DEFINITION OF FTS IN SECTION 9 HAD A SPECIFIC MEANING OF THE EXPRESSION MS, THAT I N THE INDIA-UK-DTAA THE WORD MANAGERIAL SERVICES WAS NOT THERE,THAT IN THE LICENSE FEE AGREEMENT IT WAS STATED THAT LICENSEES WISHED TO USE THE IPR AND THE TECHNICAL/MARKETING SERVICES,THAT IN THE MS AGREEMENT IT WAS MENTIONED THAT SERVICE PROVIDER HAD SPECIFIC KNOWLEDGE AND SKILLS IN THE FIELDS OF COMM ERCE, FINANCE, LAW,ADMINISTRATION AND MANAGE-MENT, THAT THESE WERE ESSENTIAL TO ENABLE THE SERVICE RECIPIENTS AS A WHOLE TO BENEFIT FROM SUCH SPECIALISED KNOWLEDGE AND SKILL IN ORDER TO CARRY OUT THE OBJECTIVES OF PROMOTING S AFETY ON LAND AND AT SEA AND IN AIR, THAT IT COULD NOT BE BASIS FOR LINKING MS WITH LICENCE FEE,THAT IN TRANSFER PRICING ASSESSMENT NO NEXUS HAD BEEN FOUND BETWEEN LICENSE AGREEMENT AND ITA NO.3586 &3139/MUM/2011(06-07) M/S. LLOYDS REGISTER U.K. (FORMERLY KNOWN AS LLOYDS REGISTER OF SHIPPING) 4 MANAGEMENT FEE AGREEMENT,THAT THE AO HAD ACCEPTED T HE FACT THE SERVICES WERE NOT COVERED UNDER SECTION 9(1)(VI)( C) R.W. EXPLANA TION-2(VI),THAT PROVISIONS OF ARTICLE 13-(4)(A) HAD NO APPLICATION. AFTER GOING THROUGH THE ASSESSMENT ORDER AND THE SU BMISSION OF THE ASSESSEE ,THE FAA HELD THAT THE WORD MANAGERIALDID NOT FIND A P LACE IN THE DEFINITION OF FTS UNDER INDIA-UK TAX TREATY,THAT FEE PAID FOR MS COUL D NOT BE REGARDED AS FTS.HE REFERRED TO THE CASE OF TEMKEN INDIA LTD.AND OBSERV ED THAT THE AAR HAD APPLIED ARTICLE 12 OF INDIA TAX TREATY IN RESPECT OF MS,TH AT THE PROVISIONS OF INDIA-US TREATY AND THE INDIA-UK DTAA WERE SIMILAR IN RESPEC T OF MS,THAT THE MS SIGNIFIED SERVICE FOR MANAGEMENT OF AFFAIRS OR SERVICES RENDE RED IN PERFORMING MANAGEMENT FUNCTIONS,THAT IT INVOLVED ADOPTION OR T O CARRYOUT OUT POLICIES OF ORGANIZATION AS A WHOLE.HE GAVE A LIST OF SERVICES WHICH WOULD NOT QUALIFY UNDER THE HEAD MANAGERIAL SERVICE AND FURTHER HELD THAT SCHEDULE 3 OF MANAGEMENT SERVICES PROVED THAT ASSESSEE WAS GETTING MONEY FOR GETTING TECHNICAL SERVICES RATHER THAN MANAGERIAL SERVICES, THAT CERTIFICATION OF MACHINERY OF PRODUCT WAS TECHNICAL SERVICE AND NOT MANAGERIAL SERVICE, THAT LLOYD REGISTERS RULES AND REGULATIONS WAS ALSO TECHNICAL SERVICE,THAT SIMILAR LY EXPENDITURE INCURRED ON INFORMATION TECHNOLOGY, HARDWARE MAINTENANCE AND SO FTWARE MAINTENANCE COULD NOT BE CATEGORISED AS MS,THAT PROVIDING COMPREHENSI VE INSURANCE PROGRAMME FOR THIRD PARTIES WAS NOT MANAGERIAL FUNCTION -RATHER IT WAS A TECHNICAL SERVICE, THAT IT WAS VERY DIFFICULT TO SEGREGATE MANAGERIAL AND TECHNICAL SERVICE SHOWN BY THE ASSESSEE BECAUSE OF COMPOSITE NATURE OF SERVICES R ENDERED BY ASSESSEE TO ITS SUBSIDIARIES,THAT IN THE EARLIER YEARS ASSESSEE WA S CARRYING OUT ITS BUSINESS IN INDIA AND HAD NOT CLAIMED ANY BIFURCATION UNDER THE RESPECTIVE HEADS,THAT IN THE YEAR UNDER CONSIDERATION BUSINESS PROFIT WAS OFFERE D FOR TAXATION BY SUBSIDIARY IN INDIA BESIDES PAYING ROYALTY AND MANAGERIAL SERVICE S BY THE SUBSIDIARIES TO THE ASSESSEE,THAT THE AO AND THE ASESSEE HAD SOME MERIT S IN THEIR ARGUMENTS ABOUT TAXABILITY/NON-TAXABILITY OF MS,THAT OUT OF TOTAL M ANAGEMENT CHARGES OF RS.4.65 CRORES 50% HAD TO BE ALLOWED AS MANAGEMENT CHARGES( NON TAXABLE)AND BALANCE 50% WAS TO BE TREATED AS FTS(TAXABLE). 4. BEFORE US,THE DEPARTMENTAL REPRESENTATIVE(DR)STATED THAT THERE WAS NO JUSTIFICATION TO HOLD THAT ONLY 50% OF THE MANAGERI AL CHARGES WERE TAXABLE IN INDIA,THAT THE ENTIRE RECEIPT SHOULD BE TREATED AS FTS. THE AUTHORISED REPRESENTATIVE(AR)REFERRED TO PAGE IS 35,38,43, 51, 54, 56 OF THE PAPER BOOK AND ANALYSED THE PROVISIONS OF VARIOUS SCHEDULES OF THE AGREEMENTS I.E. ROYALTY AGREEMENT AND MANAGERIAL SERVICE AGREEMENT.HE STATE D THAT CONSIDERATION FOR USE OF IPR AND CONSULTANCY WERE COVERED BY THE OTHER AG REEMENT,THAT INTANGIBLE RIGHTS AND TECHNICAL SERVICES WERE RENDERED AS PER THE PROVISION OF THE SAID AGREEMENT,THAT MANAGERIAL SERVICES WERE DIFFERENT,T HAT THEY WERE NOT FOR EXPLOITING INTANGIBLE PROPERTIES,THAT THE AO HAD DI SCUSSED THE MANAGERIAL SERVICES AT PAGES FOUR AND FIVE OF HIS ORDER, THAT THE SERVICES PROVIDED BY THE ASSESSEE WERE NOT IN THE NATURE OF TECHNICAL OR CON SULTANCY SERVICES,THAT GENERAL,ADVISORY,ADMINISTRATIVE,SUPERVISORY SERVICE S COULD BE CONSIDERED MS.REFERRING TO THE PROVISIONS OF ARTICLE 13(4)(A) OF THE DTAA,HE ARGUED THAT SERVICES RENDERED BY THE ASSESSEE COULD NOT BE TAXE D UNDER THE HEAD MS,THAT ITA NO.3586 &3139/MUM/2011(06-07) M/S. LLOYDS REGISTER U.K. (FORMERLY KNOWN AS LLOYDS REGISTER OF SHIPPING) 5 NOTHING WAS MADE AVAILABLE BY THE ASSESSEE.HE REFER RED TO THE CASES OF DE BEERS INDIA MINERALS (P.)LTD.(346ITR467),AND GUY CARPENTE R & CO.LTD.(346ITR505).HE FURTHER STATED THAT CONDITION S LAID DOWN BY SUB-ARTICLES A,B,C OF ARTICLE13(4) OF THE TAX-TREATY WERE NOT FU LFILLED.HE ALSO REFERRED TO CASE OF INDIAN AIRLINES (59ITD313).HE ALTERNATIVELY ARGUED THAT TAXING 50% OF MS WAS ON HIGHER SIDE, THAT THE FAA HAD NOT GIVEN ANY REAS ONABLE CAUSE FOR TAXING HALF OF THE MS,THAT EVEN IF PORTION OF IT WAS TO BE TAXED IT SHOULD HAVE BEEN RESTRICTED TO 10-15% OF THE TOTAL RECEIPT. 5. WE FIND THAT THE ASSESSEE HAD RECEIVED RS.14,78,35, 401/-AS ROYALTY AND RS. 4.65 CRORES AS MS, THAT IT HAD CLAIMED THAT MANAGERIAL-C HARGES, RECEIVED BY IT, WERE NOT TAXABLE IN INDIA, THAT THE AO WAS OF THE VIEW T HAT NOTWITHSTANDING TWO AGREEMENTS ENTIRE MANAGEMENT CHARGES WERE TAXABLE A S FTS, THAT THE FAA HAD HELD THAT HALF OF THE MS CHARGES WERE TO BE TAXED I N INDIA, THAT WHILE DECIDING THE APPEAL,HE HAD NOT GIVEN ANY REASON AS TO WHY 50% OF THE RECEIPTS SHOULD BE TREATED AS MS, THAT THE ASESSEE AS AN ALTERNATE PLE A HAD STATED THAT IF ANY ADDITION WAS TO BE MADE IT SHOULD HAVE BEEN RESTRICTED TO 10 -15% OF THE PAYMENT. WE FURTHER FIND THAT THE FAA HAD DISCUSSED A FEW SERVI CES AND HAS STATED THAT SAME COULD BE TREATED AS MS. BUT, HE HAS NOT ANALYSED TH E BILLS THAT WOULD GIVEN HIM A CLEAR AND FAIR IDEA AS TO WHICH SERVICES WERE ACTUA LLY RENDERED BY THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION AND THAT WHICH COULD B E TREATED MS OR OTHERWISE. WITHOUT ESTABLISHING THE PRIMARY FACTS, HE SHOULD N OT HAVE DECIDED THE ISSUE. WE DO NOT FIND ANY BASIS FOR HOLDING THAT 50% OF THE M ANAGERIAL CHARGES SHOULD BE TAXED IN OUR, OPINION, MATTER NEEDS FURTHER INVESTI GATION AND VERIFICATION, AS HIS ORDER LACKS REASONING. THEREFORE, IN THE INTEREST O F JUSTICE, WE ARE RESTORING BACK THE ISSUE TO THE FILE OF THE FAA FOR FRESH ADJUDICA TION WHO WILL DECIDE THE ISSUE AFRESH AFTER AFFORDING A REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. GROUND NO.1 IS DECIDED IN FAVOUR OF THE AO, IN PART . FIRST GROUND OF APPEAL RAISED BY THE ASSESSEE AND T HE AO STAND PARTLY ALLOWED 5. SECOND GROUND OF APPEAL, RAISED BY THE AO, IS ABOV E DELETING THE INTEREST CHARGE U/S. 234 B OF THE ACT. WE FIND THAT THE HONBLE BOMABY HIGH COURT IN THE CASE OF NGC NETWORK ASIA LLC.(31 ITR 187) HAS DECIDED THE ISSUE OF CHARGING OF 234B INTEREST IN FAVOUR OF THE ASSESSES AND AGAINST THE AO. RESPECTFULLY FOLLOWING THE ABOV E, WE DECIDE THE SECOND GROUND OF APPEAL AGAINST THE AO AS A RESULT, APPEALS FILE BY THE ASSESSEE AND THE A O STAND PARTLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH SEP, 2017. 13 ,2017 SD/- SD/- ( /RAM LAL NEGI) ( / RAJENDRA) ITA NO.3586 &3139/MUM/2011(06-07) M/S. LLOYDS REGISTER U.K. (FORMERLY KNOWN AS LLOYDS REGISTER OF SHIPPING) 6 /JUDICIAL MEMBER / ACCOUNTANT MEMBER /MUMBAI, /DATE: 13.09.2017 . . . .. . N.V, SR.PS / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , L , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.